Antero Resources (NYSE:AR) is a midcap, independent energy company engaged in exploration and production of oil, gas and natural gas liquids (NGL). All of the company’s operations are located in the Appalachian Basin in West Virginia, Ohio and Pennsylvania. Here, Antero owns 334,000 net acres at Marcellus Shale and 104,000 net acres at Utica Shale. By the end of June 2013, Antero Resources had 6.3 trillion cubic feet equivalents of proven reserves. Its drilling inventory includes 4,576 potential horizontal well locations, which includes around 64% prospects of liquid rich drilling.

The energy company, which is controlled by the private equity firm Warburg Pincus, came to the stock markets earlier this year and started trading at NYSE on Oct. 10. Since then, after posting a significant increase in the following days, the company’s shares are now trading just 20% above the IPO price. Several analysts, such as Jefferies and Barclays, have set lofty price targets on its stock, making a compelling buy case for this newcomer.

Quarterly Earnings

Antero has recently released its quarterly results in which its GAAP numbers were influenced by commodities derivatives. The company reported total revenues of $384.52 million, which is up from negative revenues of $92 millions in the same quarter last year. The current year’s revenues include a non-cash gain of $114.93 million on unsettled derivatives while in the same quarter last year, Antero recorded a non-cash loss of $203.79 million on unsettled derivatives.

In this case, the adjusted figures offer a better comparison. Antero’s adjusted revenues rose to $269.59 million, from $111.87 million in the same quarter last year. On the earnings front, the company swung to adjusted earnings of $48.75 million from a net loss of $12.12 million a year ago. In short, the company has witnessed considerable growth in top and bottom line. Moreover, given the current production plans, Antero will likely carry this growth momentum into the future.

Production Numbers

In the third quarter of 2013, Antero’s net production rose by an impressive 128% to 566 million cubic feet equivalent per day (mmcfed), from 248 mmcfed in the third quarter of 2012. This increase can be attributed to 34 new wells at Marcellus and 10 new wells at Utica that started production in the previous quarter. During the quarter, Antero produced 519 mmcfd of natural gas, which makes 92% of its total production. The NGL and crude oil production was 6,929 barrel per day, which was 7% of the total production mix, and 948 barrel per day, 1% of the total production mix, respectively.

The business completed 44 gross, or 40 net, horizontal wells in both main regions: Marcellus and Utica Shale. On both these locations, Antero has 65 gross, or 59 net, operated wells awaiting completion.

At Marcellus, company worked with 15 drilling rigs and will continue operating with the same number of rigs through 2014. Using these rigs, Antero will drill 133 horizontal wells in current year. So far, Antero has completed 217 wells in the region that with an average cost of $9.2 million per well.

At Utica, company has 4 drilling rigs in operations and will add an additional rig in the current quarter. Here, the company has 12 horizontal wells in operations, which were drilled and completed at a cost of $12.3 million per well. Besides these, the company has 12 more wells under completion which will take its total well count to 24 by the end of the current year.

Investors who missed out on Antero’s IPO should consider Cabot Oil and Gas (NYSE:COG), whichis another small independent energy firm engaged in exploration and production of oil and gas and like Antero, Cabot also has significant exposure towards Marcellus Shale. Topeka Capital believes that Cabot can achieve more than 30% production growth over the next several years while generating positive free cash flows. The firm has rated Cabot a buy and has given a price target of $45, which shows a potential upside of 36% from the current price levels.

Conclusion: Bullish on Antero

Similarly, as identified earlier in the article, Jefferies and Barclays have set price targets of $63 and $75 on Antero’s stock. These two targets represent a potential upside of 20% and 42% from the current price levels. The overall market segment is clearly bullish. With the increase in exploration and production activity, Antero will significantly increase its output in the coming quarters.

According to the company’s guidance, in the fourth quarter, Antero will increase its net production to the mid-point of 675 mmcfed while its liquids production will increase to around 13,500 barrels per day.

Although its stock is trading 247 times trailing earnings and 23 times trailing sales, which makes it an expensive purchase, markets believe that the company’s top line could double in the next two years.

However, investors should note that Antero is essentially a natural gas producer and is therefore exposed to the volatility and persistent weakness in the natural gas pricing environment. The company also doesn’t give any dividends.

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